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Morningstar | Campbell Further Honing Its Focus on North America With Sale of Kelsen; Shares a Touch Undervalued

Building on its announcement in August 2018 and following the sale of its fresh business earlier in 2019 (which generated proceeds of $565 million), wide-moat Campbell announced on July 12 it plans to sell Kelsen, its baked-snacking business (including brands such as Kjeldsens and Royal Dansk), to privately held Ferrero for $300 million. The deal, which is expected to close by the end of October, implies a valuation of about 2 times trailing sales (in line with the low-single-digit multiple expectation we had previously laid out). Beside the opportunity to operate with a more focused portfolio (and ultimately concentrate its resources on the highest-return opportunities), we are also encouraged by management’s intent to direct any proceeds to paying down debt, as leverage skyrocketed to about 6 times following the tie-up with Snyder’s-Lance in 2018. However, we also expect that the return of excess cash to shareholders will persist, with our forecast implying mid-single-digit annual growth in the dividend (which yields about 3.5%) over the next decade. We therefore see little reason to alter our stance over the firm’s stewardship of shareholder capital, which we rate as Standard.

At a low-single-digit percentage of sales, this deal fails to change our $45.50 per share valuation, and we do not anticipate any alterations to our long-term outlook (which calls for organic sales hovering at about 2% annually and operating margins amounting to the high teens, generally in line with the firm’s aims). However, we believe this is another step to help steady the ship and execute management’s updated playbook, which is prudently anchored in driving profitable growth across its core meals, beverages, and snacking markets. We also believe that this change is likely to occur over multiple years. At a 10% discount to our valuation, we suggest investors keep this wide-moat name on their radar.

Even after this separation, Campbell is still busy parsing out its Arnott’s biscuit business, based in Australia, though we believe management is committed to selling this business despite the dearth of news. Beyond carving out its fresh and now international fare (representing $2.1 billion in fiscal 2018 sales, about one fifth of its consolidated base), we recently asked CEO Clouse about the merits of slimming down further. While he suggested the firm is committed to executing the task, he left the door open for select asset sales in future. Although we agree that shrinking to grow is not a sustainable plan, we view efforts to concentrate resources to steady the business on its home turf, which has been struggling amid intense competition, favorably.